Question: You own a retailer of boats, motors, and marine accessories. The store manager has just informed you that the amount of the physical inventory was incorrectly reported as $630,000 instead of the correct amount of $360,000. Unfortunately, yesterday you sent the quarterly financial statements to the stockholders. Now you must send revised statements and a letter of explanation.
(a) What effect did the error have on the items of the balance sheet for the retailer? Express your answer as overstated or understated for the items affected by the error. Merchandise inventory was by $. Therefore, Current assets, Total assets, and Total stockholders' equity were by $.
(b) What effect will the error have on the items of the income statement for the retailer? The cost of goods sold was by $. Therefore, gross profit and net income were by $.
(c) Did this error make the retailer's quarterly results look better or worse than they actually were? The inventory error made the company's quarterly results look than they actually were.